Boston College, Carroll School of Management

How to Export VCs from Silicon Valley to Emerging Markets?

Emerging markets–China, Brazil, Indonesia, Russia, South Africa and Turkey–seem to be the next place to go in the realm of venture capital. According to The Economist, in 2011, $3.4 billion of venture-capital deals were done in emerging markets, more than double the amount in 2008.

Two of the VC firms we will be visiting–KPCB and Sequoia–both hold large, diversified portfolios of Chinese companies ranging from biotech to cosmetic retails. They both invested in Alibaba and JD.com.

Most people probably know Alibaba. It is the biggest e-commerce giant in China whose service includes online retail, personal finance, mobile payment and many more. In the fiscal year 2017, its revenue reached an overall increase of 56% to $22,994 billion. With 560 million Internet users spending 20 hours online per week, China is by far the largest Internet market in the world — twice the size of the U.S. market. Alibaba’s dominance is astonishing. Its mobile payment/finance app is truly a one-stop destination for a Chinese: one can easily manage mortgage loans and utility bills in one app.

JD.com is Alibaba’s online retail business rivalry. While Alibaba’s online retail is mostly consumer-to-consumer, JD.com is primarily business-to-consumer. According to Sequoia, JD.com is China’s largest e-tailer and the third largest internet company in the world by revenue. The company’s public listing, in May of 2014, was the largest IPO of the year on NASDAQ.

Separately, they invested in many other unicorn-like companies in China, such as Baidu (KPCB), the Chinese Google and Didi (Sequoia), the Chinese uber.

Clearly, these VC firms are doing well in China. But my previous analogy exactly hinted at the less known realities of start-ups in emerging markets and the subsequent challenges. Baidu and Didi both were inspired by American companies who turned out to be more successful mostly because of their familiarity with Chinese regulations and resourcefulness in navigating political climate.

In the assigned video for this class, Doug Leone explained that Sequoia pulled out of Brazil because there were not enough computer engineers to truly create an environment of technology entrepreneurship. At some other occasions, Doug Leone expressed:

“In emerging markets like China, around 50% of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil, it is closer to 70%.”

The biggest advantage of these copy-cats is the ability to tailor the businesses to local habits. For example, Flipkart is an online-commerce site in India. It has received funding from a New York hedge fund and a Californian venture-capital firm. Credit cards are less common in India, Flipkart’s value proposition is the option of payment on delivery.

In Turkey, Trendyol is a flash sale site backed by KPCB. It is modeled after Vente-privee.com, a French e-commerce company that pioneered the model of online flash sales in 2001, and Gilt Groupe, an American company popularised the idea of time-limited online sales of designer clothing. It is different in that it sells its own clothing line with seasonal designs “crowdsourced” from users in Turkey.

The problem is that these copycats can easily lose share when the original company eventually enters the local market. As The Economist notes, Sonico was once the Facebook of Latin America. Its active user base plummeted when Facebook arrived. Further, even if they can compete well with the original company in their country, they are unlikely to establish international presence because the concepts are not new.

The answer to the question in the title is not simple. I do not want to take away the excitement of silicon valley expanding its investment portfolio into emerging markets, but I want to put things in perspective because I used to be overly-excited about the always-positive venture capital narrative in emerging markets and was totally blind about these challenges. I have couple questions for Sequoia and KPCB:

For Sequoia: Doug Leone emphasized that Sequoia China is not a franchise but Sequoia in China when the early operation in China was quite decentralized. How was Sequoia able to make sure Sequoia China stay consistent with the existing culture and values?

For KPCB: I noticed on your website that KPCB China operates independently, and I am guessing due to Chinese regulation. How is KPCB China in relation to KPCB in terms of decision making and how do you orient KPCB China with the same culture.

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10 thoughts on “How to Export VCs from Silicon Valley to Emerging Markets?”

This blog was really insightful, Jenny! While “copycats” in China and India would definitely have issues going global, their large populations definitely make up for it. If they can slightly differentiate themselves through perhaps appealing more to the local culture, they can then maybe hold on to their market share when the original expands to their region. Regardless, it’ll be really interesting to see how things play out in the emerging markets!

Really interesting post, Jenny! You bring a great perspective to our discussions of international markets. You’re right that foreign markets offer immense potential for growth and expansion. Take Uber for example. The company’s growth has been largely fueled by its entrance into markets overseas. I agree that international regulation and unfamiliarity with foreign laws can and do act as huge barriers to entry. An added layer of difficulty is that often, people of a nation prefer the domestic company. In the case of Uber and Didi, the people of China largely preferred Didi because the company is of Chinese origin. The unique bond companies develop with consumers can be powerful!

Cool idea for a post, I haven’t put much thought into VC involvement in these emerging markets, as companies like JD and Alibaba haven’t really directly impacted me. Over winter break I read In the Plex (about Google) and one of the aspects I found most interesting was their struggle to get into the Chinese market. Baidu ultimately ended up on top because their understanding of Chinese culture was far superior to this American company’s. So though there is potential in some emerging markets for these copycats to be overpowered, foreign companies have been trying to infiltrate the Chinese market for years without success, so I don’t see much chance of that happening there at least for a little while.

Great post! We (i.e. BC students) often forget the emerging markets when it comes to tech companies, but those are hugely important. Of course, I’m not sure I’d call China an “emerging market” anymore. Not only is it huge, but it’s its own ecosystem and really is an entirely different beast than the others (e.g. India, Brazil, etc).

Hi Jenny! I loved this post!
I agree with Camille that cultural understanding is so important that it might give the domestic “copy-cat” companies an advantage over more international ones trying to break into the market. I think it really depends on how much effort and research the foreign company does. Case studies show that companies like McDonald’s have done a good job expanding internationally and tailoring menus to local tastes but even giants like Disney fail to consider cultural differences (like during the establishment of Euro Disney).
Two things I’m interested in seeing is how companies we are visiting like Fanatics are trying to break into other markets and also how much emphasis there is in the venture capital world to invest in emerging markets instead of at home in Silicon Valley.

Jen, great post!
I really appreciate that you dove deeper into the functions of Kleiner and Sequoia. Looking at these VC’s from a global operations perspective is crucial and a point I didn’t touch on in my post/presentation. China is a really interesting place for US venture involvement because of the regulation and market barriers. I am curious if Alibaba, Baidu, Didi and the likes were eager to accept western venture money, or if these VC’s had to pursue them.

Jenny, I really loved this post. It is really interesting to think of VC’s role in creating businesses in international markets. In the US, a fifth of current public companies received venture capital financing. I think that bringing the financing could create a huge boom in industry in places like Brazil or India.

On of the things I have always been interested in is micro financing done in the developing world. I know most of the time that is is done in more of a charitable way, but I would love to see early stage seed investments in places where financing is very hard to come by.

Great post! I think international investments are the most logical next step for domestic VCs due to the fact that the US markets are currently flooded with private capital and funding rounds for startups, from the perspective of the investor, are becoming increasingly more competitive as VC/PE firms raise bigger funds. Your mention of copycats was insightful and reminded me of an AirBnb copycat in China called Tujia. While others mentioned that these local copycats have cultural advantages, I think it’s important to mention that they also have some advantages when it comes to government regulation as well (especially in places in China).

Super insightful post, Jenny! In the book I read over break, The Sharing Economy, Sundararajan names a myriad of these copycat companies throughout his book––for example, international companies imitating Uber like Didi, Ola, BlaBlaCar, and more. What you talk about in your post is so true, and yet it hadn’t crossed my mind before. The impact that these emerging markets will have on VC firms that are trying to expand internationally is inevitable. But I also agree with Julia, that it could be possible for the copycat companies to be successful in the face of these challenges. I think they already have a huge step up with their expertise on the local market environment, and could possibly use switching costs to their advantage as well.

Jenny, thanks for this post! It was a great idea for a blog post. Alibaba in particular is a company that continues to amaze me. They are pouring abnormally large sums of money into R&D to develop the best technologies possible, and it’s amazing to read about! I remember reading an article in the WSJ recently about Alibaba doubling its expected R&D investment in 2018, and this sum of money was larger than R&D costs for a few US tech giants combined! I also think Africa has a huge potential for startups: African countries in general are really behind in technology, and if startups can implement technology successfully, it could save lives and make for better lives for African people! In my startup post, I wrote about Zipline – a company that plans to use drone technology to make medical deliveries in emergency situations. Awesome work!